Final Flashcards
Letter of Intent
- Clarifies deal terms (decided v. open)
- sets up due diligence
**Terms, even if originally enforceable, become unenforceable if LOI expires
LOI Binding Provisions
- No shop
- Confidentiality
- Governing Law
- Public announcements
LOI Non-Binding Provisions
- Deal terms
- Reps & Warranties
- Terminations Fees
DE §144
Shareholder ratification/cleansing vote
- Burden of proving entire fairness shifted to π if transaction is approved by a majority of the minority s/hs
- Not a “get out of jail free” card
DE §251 Statutory Mergers
- By operation of law, shares of T become shares of B (according to ratio established by merger K)
- ALL assets & liabilities follow
DE §251 Merger Approvals
- Both bds
- T s/h’s
- B s/h’s UNLESS:
- –B’s shares unaffected,
- –B’s certificate of incorporation is not changed; AND
- –B is NOT using more than 20% of shares outstanding immediately prior to deal
DE §253 Short-Term Mergers
When parent owns 90%+ of subsidiary’s stock, ONLY approval needed is P bd
-Absent illegality or fraud, appraisal is the EXCLUSIVE remedy available to minority s/h who objects
DE Triangular Mergers
Forward = NewCo survives Reverse= T survives (use if anything non-transferable)
APPROVALS: both bds, s/h of dissolved corp, s/h of surviving corp (unless §251(f))
DE §262 Appraisal Rights
- Only applies in §251 mergers
- Dissenting s/h has right to be cashed out based on FMV of entire entity
- EXCEPTIONS
(1) Market out - s/h in publicly traded company
(2) surviving s/h not entitled to vote under §251(f) - EXCEPTION TO EXCEPTION
- –rights are revived where s/h is forced to accept consideration other than stock
DE §271 Asset Acquisition
- T sells all or substantially all assets to B
- Negotiations determine which liabilities go with them
- Remaining car’s must be allowed for before consideration can be distributed to s/hs
-APPROVALS: both bds, T s/h, NOT B s/h
“Substantially All”
(1) Vital to operation of corp
(2) Over 50%
(3) Out of the ordinary transaction
(4) Substantially effects existence and purpose of corp
(5) Asset strikes at the heart of corp’s existence
DE Stock Acquisitions
From T - need both bd approvals
From T s/h - only need approval of B’s bd
CA §183 De Facto Mergers
Regardless of form, substance of deal if merger if:
(1) transfer of all shares & assets
(2) assumption of liabilities
(3) pooling of interests
(4) absorption and dissolution
(5) joinder of officers & directors
(6) T execs retained by B
(7) S/hs of absorbed corp surrender existing shares for newly issued shares
DE Independent Legal Significance Doctrine
An action taken pursuant to the auth’y of the various sections of the law constitute acts of independent legal significance and their validity is not dependent on other sections of the act
CA §1200 Board Approvals
Merger: both
Asset: both
Exchange: B
CA §1201 S/h Approvals
If co’s bd approval is req’d, it’s s/hs must also approve UNLESS:
(1) shares remain unchanged
OR
(2) corp will own, immediately after the reorganization, equity securities of the surviving corp that equate to more than 5/6 of the voting power
CA §1300 Appraisal Rights
If s/hs were entitled to vote, each can demand FMV of dissenting shares in cash
- Market out exception: publicly traded shares
- Exception to exception: 5%+ of outstanding shares of the class demand appraisal
CA §2115 Quasi-CA Corps
Foreign corp’s articles of incorporation are deemed amended to comply w/ CA law IF:
(1) 50%+ of voting securities are held of record by people with CA addresses; AND
(2) 50%+ of business is in CA (measured by assets, payroll, and sales)
DE cts refuse to apply
Internal Affairs Doctrine
Only state of incorporation should have auth’y to regulate matters than pertain to the relationships among and between a corp & its officers, directors, and s/hs
Majorities
Simple= majority of voted shares
Absolute = majority of shares entitled to vote
Super = established in articles; makes minority vote necessary to approve specified issues
NYSE §312
S/h approval is req’d ANY time you issue more than 20% of shares
Weinberger Entire Fairness
FAIR DEALING = PROCESS
–time constraints, arm’s length negotiations, uninformed votes, concealing superior knowledge
FAIR PRICE = RESULT
–must consider ALL relevant factors EXCEPT “speculative elements of value that may have arisen from the accomplishment or expectations of the merger”
Independent Negotiating Committee
Shifts entire fairness burden to π
Must have real bargaining power that it can exercise on an arm’s length basis
Change in Control Provisions
- Change in ownership in excess of X%
- Change in X% of bd w/in X time
Exceptions to Non-Assumption of Liability by Asset Purchaser
(1) P expressly or impliedly agreed to assume
(2) transaction is a merger
(3) P’s mere continuation of seller
(4) transaction is a fraudulent attempt to evade seller’s liabilities
(5) CA TORT LAW - PRODUCT LINE EXCEPTION
- –π lacks adequate remedy against seller/manufacturer
- –P knows about product risks associated wi/ the line it continues
- –Seller transfers goodwill associated w/ product line
Securities Act of 1933
- Governs an ORIGINAL ISSUANCE of stock
- Goal: provide sufficient info to investing public when a company issues its own securities
- MUST REGISTER OR EXEMPTION ANY SECURITY WHEN ISSUED
Registration Exemptions - Limited Offering
504: Offer and sell up to $1MM in any 12 month period to any # or type of investor w/o disclosure req’s
505: Up to $5MM to no more than 35 non-accredited investors and unlimited accredited investors. If ANY nons, must still disclose financial stmts.
Registration Exemptions - Private Placement
506: Unlimited value to no more than 35 non-accredited investors and unlimited accredited investors, IF the nons are financially sophisticated (possess sufficient knowledge and experience in financial and business matters to evaluate the investment)
Accredited Investor
“Wealthy, sophisticated person” w/ ANY of the following:
(1) Net worth $1MM+ (excluding house)
(2) Income $200K+ last 2 and next yr
(3) Corp w/ $5MM in assets
(4) Officer or director of issuing company
Securities Act of 1934
- Governs TRADING of public stock already issued
- Must register each transaction, not stock itself
‘34 Act - Periodic Reporting
8-K: anything material, w/in 48 hrs 10-Q: quarterly report 10-K: annual report 14-A: proxy stmt T-O: tender offer ??: d/o/10% s/h buying, selling w/ 180 days 13-D: acquiring control (5%+) ??: material omission/misrepresentation
Proxy Statement
Provides FULL and adequate disclosure of all material facts necessary for the s/h to make an informed decision w/ respect to a transaction that req’s s/h approval
Rule 10b-5
- Indiv in possession of material inside info must either disclose it to the investing public, or, if unable to disclose, abstain from trading
- If you change the total mix of info in the marketplace, you have an immediate obligation to correct it
Material
Information a reasonable investor would deem important in making an investment decision
Rule 14e-3
Prohibits ANYONE from divulging confidential info about a TO to persons likely to violate rule by trading on the basis of that info
Beneficial Owner
Person or entity w/ ownership interest in shares currently owned or w/ right to acquire w/in 60 days
–Includes dispositive or voting interest
Types of Consideration
- Cash (easy to value, hard to get)
- Stock (dilution issues, regulations, new owners w/ rights)
- Debt (frees up cash, OPM, lender restrictions/approvals)
- Convertibles: ability to transform one kind into another
MAC/MAE
Any event, occurrence, or development of a state of circumstances or facts which had or reasonably could be expected to have a MAE/MAC on T
Could allow B to walk away, but high burden
Baskets
Zero Base Claim - once you reach basket, you can claim everything
Deductible Claim - only claim everything over the basket amount
Non-Competes
Unenforceable in CA except in connection w/ sale of business or significant acquisition
Qualifiers
- MAC/MAE
- Knowledge
- Basket/cap
- Collars
Williams Act
Amendment to ‘34 Act that provides safeguards against “Saturday Night Special” stampedes
§13(D)
- When you reach 5% ownership of a public corp, you must disclose w/in 10 days the:
- -names of buyers, source of funds, price paid, # of shares owned, plans for co if buyer intends to gain control, info about K’s entered into w/ respect to acquired securities
**Includes indivs or acquisition groups
§13(E) - Self-TO
- Regulates issuer’s repurchase of its own securities
- All Holders Rule: can’t exclude any holders from transaction
§14(d) - 3rd Party TOs
- Schedule 14D-1: B must disclose info relating to B’s identity, source of funds, and plans to merge w/ or make material change in T
- Schedule 14D-9: T bd must give recommendation & reasons w/in 10 days of commencement
- Best Price Rule: all tending s/hs get same price
§14(E) - Disclosure During TO
- Offer must stay open 20 business days
- Shares must be purchased on pro-rata basis
§16(b) - Short Swing Profits
To prevent unfair use of inside info, if director, officer, or beneficial owner does a purchase and sale or sale and purchase w/in 180 days of each other, any profit he realizes must be disgorged to the issuer, regardless of intent
Strict liability - no equitable defenses
State Anti-Takeover Statutes - 1st Gen
Edgar v. MITE Corp
-mandatory waiting period, included foreign corps, had a subjective hearing component
–Directly opposed Williams Act so pre-empted
State Anti-Takeover Statutes - 2nd Gen
Control Share & Fair Price
CTS Corp v. Dynamics Corp of America
- IN statute req’d nexus to IN, could be opted out of by IN corps
- Not pre-empted – state CAN protect s/hs from coercive effects of TOs - Williams is about process, does not give right to or encourage TOs
State Anti-Takeover Statutes - 3rd Gen
Business Combination Statutes
Amanda Acquisition Corp
- -WI statute- if B passes threshold, has to wait 3 yrs before merging unless T bd approves in advance
- -Doesn’t mess w/ process of TO, so no pre-emption
**States CAN discourage TOs, just can’t interfere w/ process once made
DE §203
Prohibits DE corp from entering into a business combination for 3 yrs after offeror becomes an interest s/h (owns 15%+ of outstanding)
Waiting period waived IF:
(1) prior approval from T bd
(2) single transaction in which B goes from <15 to >85% of voting shares
(3) approval during wait by T bd & 2/3 of outstanding shares not owned by B
(4) T approves a white knight transaction
Wellman Test
TO Factors:
(1) Active & widespread solicitation of public s/hs
(2) solitcation made for substantial % of issuer’s stock
(3) offer made at premium over prevailing market price
(4) terms are firm & non-negotiable
(5) offer is contingent on tender of fixed # of shares
(6) only open for a limited period of time
(7) offer subjected to pressure to sell stock
(8) public announcements before or w/ rapid accumulation
Hanson Trust Rule
- Rejects Wellman Test
- To determine if TO, look at totality of circ’s - “does there appear a likelihood that, unless the pre-acquisition filing strictures are followed, there will be substantial risk that solicitees will lack info needed to make a carefully considered appraisal of the proposal”
Duty of Care
Bd is obligated to manage the corp’s business in the manner they reasonably believe to be in the corp’s best interest
CA + DE both allow exculpatory clauses preventing liability for $ damages
Business Judgment Rule
Presumption that, in decision making, bd acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interest of the corp
Puts burden of showing gross negligence on π
Levels of Bad Faith
(1) Subjective bad faith
(2) Intentional dereliction of duty - systematic failure to review proposal in accordance w/ business stds
(3) Extreme lack of care
Duty of Candor
Bd must give s/hs all material info
In DE, it is a constant duty to give info
Duty of Loyalty
Bd is obligation to make business decisions not tainted by any conflict of interest and to avoid appearances of self-dealing
Independent Director
Someone able to exercise independent judgment without conflict
DoL Rules
Squeeze Out Merger = Entire Fairness
Poison Pill = Unocal
Proxy Fight
Political campaign to win over the hearts and minds of voters
Cts will NOT enforce any plan that interferes w/ this process
Defensive Tactics by Targets
(1) Staggered/classified bd
(2) No removal of directors without cause
(3) No removal of directors w/o written consent of s/hs
(4) White Knight Rescue
(5) PacMan defense
(6) Self-tender exclusion
(7) Advanced notice bylaw provision
Poison Pills
Shareholder Rights Plan - once B passes a certain threshold, pill flips & s/hs other than B are issued a set of rights
Unocal Rule
BJR applies if:
(1) the bd had reasonable grounds for believing that a threat to corp policy & effectiveness existed, AND
(2) the defensive measures taken is a proportionate response to that threat
Unocal Threat
Bd must show they acted in good faith and conducted a reasonable investigation
Unocal Response
Proportionate = not draconian = not coercive or preclusive
coercive = force mgr-sponsored alternative on s/hs preclusive = makes successful proxy contest either mathematically impossible or realistically unattainable
Moran
Plan, redemption, and refusal to redeem all must satisfy Unocal rule, regardless of how independent the bd is, because of the “specter of self-interest”
Quickturn Design Systems
New bd must have FULL power to manage & direct the business and affairs of the corp
Cannot contractually write off fiduciary duties
Air Products v. Airgas
Under DE law, inadequate price alone is a Unocal threat - “Substantive coercion”
Even when are offer is non-coercive, it may represent a threat to s/h interest b/c a bd w/ power to refuse and actively negotiate may be able to obtain a higher value
Bd, not s/h, is responsible for election of time frame for achievement of corp goals
Revlon Duties
When (1) a sale becomes inevitable, (2) long-term strategy is abandoned in furtherance of a transaction, or (3) process would result in change in control, the bd’s role changes from defenders of corp bastion to auctioneers charged w/ getting the best price for s/hs
Lyondell Chemical Co. v. Ryan
“There is such a way of acting that is so egregious that it goes beyond care & might be disloyal”
There is no single way to meet Revlon duties - entirely fact and situation specific
Deal Protection Devices
- Shark Repellants - staggered bd & supermajority
- Poison Pills
- PacMan
- Lock Ups
- Termination fee/Liquidated damages
Mills v. MacMillian
If in Revlon mode, deal protection devices must only be those that confer substantial benefits on s/hs (increase bidding)
Ways to Go Private
Goal = < 300 s/hs
(1) stock buyback/repurchase
(2) reverse split w/ fraction elimination
(3) acquisition by private co w/o a stock payment
(4) 2 step squeeze out
(5) purchase by indiv
Fair Dealing in the Auction Process
It is not per se wrong to engage in favoritism, so long as it is geared toward getting the highest possible value
